Meme stocks and the GameStop situation, explained

Meme stocks and the GameStop situation, explained

What you probably already know: Meme stocks, or shares of a company that have something of a cult following, are getting attention again as influencers have driven massive spikes in the share prices. GameStop shares, for instance, spiked almost 370% in May after retail trader Keith Gill, also known as “Roaring Kitty,” bought additional shares in the company. The stocks are extremely volatile, however, and investors have lost about $13.1 billion on the stock, more than double the company’s value.

Why? “With meme stocks, even though the equity value might not be there, people are trading the stocks anyway,” said Shelly Lombard, who spent decades in the financial sector focused on distressed debt investing. Companies typically have to disclose when there’s a risk of bankruptcy that could wipe out the value of a stock, she said, but that doesn’t always prevent people from trading it if they think there’s a chance the company could turn things around.

What it means: GameStop shares fell 15% on Monday after the company’s CEO disclosed few details about the company’s plans to return to profitability. “For the most part, individual investors should stay away from meme stocks,” Lombard said. “It’s a huge risk, even though the stock may be cheap … because most meme stocks are in companies that have a lot of problems.”

What happens now? It’s not just GameStop. AMC, the movie theater chain, is also subject to meme stock-like movements as traders bet that the company can figure out a future where people will return to the theater. That’s drawing scrutiny from regulators and the banks behind many of the day-trading apps like E-Trade, which is considering removing Gill from its platform out of concern of stock price manipulation.

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